Executive Pay

Exploring the Issue

Since the 1980s, executive pay has risen hugely, with recent figures putting the average pay of a FTSE 100 CEO at 190 times the income of an average UK worker. For instance, when the UK was dealing with the aftermath from the financial crisis, the share of total incomes of the richest 1% was around 12%, over double of what it had been three decades earlier, according to the High Pay Centre. Whilst high pay has risen dramatically, wages for low and median workers have been rising at a much slower rate, increasing levels of pay inequality. Organisations such as the CIPD, the IoD and PwC have all criticised the prevailing current model of executive pay, and there have been instances of public backlash against what is perceived as excessively high pay, especially with the growing cost of living crisis and the increasing apparent disregard for truth in politics and business.

Whilst some argue that high pay is deserved because of the value highly experienced executives add to huge companies, executive pay has been increasing year on year, and frequently without commensurate increases in shareholder value or other measures of executive success. Contributing factors to ratcheting up high executive pay may include:

Methods of Recruitment – Rather than promoting internally, some companies hire head-hunters to seek out senior staff from elsewhere, who are then promised pay increases to take on a new role.

Long-term Incentive Plans – Criticised as it may lead to short-term pay inflation as some CEOs discount the future value of delayed (LTIP) pay are negotiate harder for higher salary pay to ‘compensate’.

Assessing pay levels can be achieved, in part, by examining an organisation’s pay ratios. High multiples between the highest paid and lowest paid members of an organisation have caught the attention of unions, campaigners and many politicians. When looking at pay ratios, sector and company size are important to bear in mind. For example, an investment bank, where most people in the organisation are likely to be highly paid, the pay ratio will likely be much lower than perhaps a supermarket, where most of the workers earn low wages, even if the investment bank’s CEO is paid more than the supermarket’s CEO.

Further, it should be noted that a desire to keep pay ratios low may lead to companies ‘outsourcing’ low-paid work such as catering, cleaning and security. On the other hand, highly paid individuals may work through ‘personal service companies’ receiving payment, rather than income. Ratios are therefore valuable as long as they are provided within the context of the company, regarding its sector, size etc., and with full disclosure on how ratios were calculated.

High executive pay can be damaging for businesses for two primary reasons. Firstly, it can be bad for a business’s reputation in the eyes of the public. And secondly, there is evidence that high levels of pay inequality within the workforce are bad for staff morale and productivity. Some pay inequality is motivational, encouraging staff to work hard to be promoted. However, according to research by the High Pay Centre, companies in which the highest paid member of staff earns over 24 times the lowest paid experience higher staff turnover, greater absenteeism and more frequent industrial action.